Wednesday, 19 August 2015

Succession Planning for the Family Business

How does the founder of a family business cope with the sharing of power and control?

As family businesses grow larger and more successful they gradually outgrow their original business structure and founder’s experience. This is when family firms need to professionalize their business with a more formal corporate structure and adopt a more collaborative management style.

Outgrowing the founder’s experience

The founder’s knowledge and experience are usually in specific skill areas like engineering or sales. They are best at the idea and launch stage, but once the business begins to grow their boundaries of skills and experience are tested. They often know only as much as they have taught themselves.

Formalizing the business
The company also begins to outgrow their smaller organizational structure and needs to acquire a more formal structure. Continuing to run the family business as it originated can become stifling to existing employees and be a deterrent to the recruitment of new employees. Banks also prefer a less-centralized structure with less dependence on a sole founder and more emphasis on an experienced management team.

The breaking point
Eventually the business reaches the scale and size where the founder needs to relinquish some responsibility to others. This is a sensitive issue to most founders who may view giving up responsibility as a loss of control. They may perceive this diminished authority and control as a sign of weakness.

Founders can react to the changes in one of two ways:
1.    They may resist the change and become more insular, keeping things even closer to the vest
2.    They may accept the change as an opportunity to share their vision and become more collaborative

There are two common methods of relinquishing authority
1.    Developing family members through succession planning
2.    Hiring outside non-family executives

Staying within – developing family members
The most logical step in delegating responsibility is to groom the children within the family business to take on more responsibility. The founder usually has a high level of trust with family members and has an innate desire to have them succeed in the business. Strangely, founders can find it harder to delegate responsibility to a child, because they may not have confidence in their children’s skill level.

Going outside – bringing in non-family talent

Another common option is to bring in outside non-family executives to share responsibility. This outside talent can help guide the business through the later stages of growth. They also bring in expertise to supplement skills that the founder may be lacking. Relinquishing control to outside non-family talent can often be more comfortable than to a child or other member of the family. They are a more neutral party, which helps to remove any personal feelings. In some cases, they can also serve as a way of avoiding the sensitive succession issue of choosing between multiple children to lead the company.

What’s the best solution?

Some family businesses choose a hybrid solution by bringing in an outside interim CEO. This is most effective when the younger generation is not ready for the responsibility, but the founder wants to keep the family in control of the business. An interim CEO is usually hired with the understanding of being in the position for a set period of time with the future expectation of a family member taking over. An interim CEO can be a trusted advisor who has worked closely with the business family or an industry veteran who has a proven track record. An interim CEO can be a good solution by combining the best of both options.

What about the legacy of the business?

Giving up any control in a private business is hard for a founder to accept, especially in a family business where it also involves the added personal aspect of the family legacy. As the business grows, its requirements and challenges change.

Successful companies learn to diminish the “emotional” aspect of the business by removing the pressure of the family legacy. Parents who can confide in their children that the legacy is not important to them can help the younger generation be more accepting of the changes. Likewise, treating the business as a business and not as an inherently personal entity can help the founder become more open to others sharing control and responsibility.

These issues can cause family conflict if not handled sensitively. Using an outside advisor who can facilitate the process can help reduce conflict. The process doesn’t have to be complicated, but having a neutral party working with the business can help prevent the personal issues from creeping in and keep the process moving forward.

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